i. Draw Mary’s budget constraint, (put home cooked meal on the horizontal axis) showing the trade-off between a home cooked meal and eating at a restaurant. ii. Draw an indifference curve showing the optimum choice. Label the optimum as point A. iii. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution.
Mary has two dinner options available: eating a home cooked meal for $150 per meal, or at a restaurant for $260 per meal. Her weekly budget is $2500.
i. Draw Mary’s budget constraint, (put home cooked meal on the horizontal
axis) showing the trade-off between a home cooked meal and eating at a
restaurant.
ii. Draw an indifference curve showing the optimum choice. Label the
optimum as point A.
iii. What would be the marginal rate of substitution at the point that
corresponds to the optimal consumption choice? Interpret the marginal
rate of substitution.
iv. Suppose the price of a home cooked meal increases to $200 and income
increases to $4200. Show the impact of the new budget line relative to the
original budget line. What would be the new marginal rate of substitution
that corresponds to the optimal consumption choice? Interpret the
marginal rate of substitution.
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